SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended MARCH 31, 1999,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from _____________ to
________________
Commission File Number: 001-12878
TIME WARNER ENTERTAINMENT COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3666692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
AMERICAN TELEVISION AND COMMUNICATIONS
CORPORATION Delaware 13-2922502
WARNER COMMUNICATIONS INC. Delaware 13-2696809
(Exact name of registrant as
specified in its charter) (State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including area code,
of each registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No //
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TIME WARNER ENTERTAINMENT COMPANY L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
<TABLE>
PAGE
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TWE
GENERAL
TWE PARTNERS
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Management's discussion and analysis of results of operations and financial condition............. 1 19
Consolidated balance sheets at March 31, 1999 and December 31, 1998............................... 9 24
Consolidated statements of operations for the three months ended March 31, 1999
and 1998....................................................................................... 10 25
Consolidated statements of cash flows for the three months ended March 31, 1999
and 1998....................................................................................... 11 26
Consolidated statements of partnership capital and shareholders' equity for the
three months ended March 31, 1999 and 1998..................................................... 12 27
Notes to consolidated financial statements........................................................ 13 28
PART II. OTHER INFORMATION........................................................................ 33
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
Time Warner Entertainment Company, L.P. ("TWE" or the "Company")
classifies its business interests into three fundamental areas: CABLE NETWORKS,
consisting principally of interests in cable television programming;
ENTERTAINMENT, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and CABLE, consisting
principally of interests in cable television systems. TWE also manages the
cable properties owned by Time Warner and the combined cable television
operations are conducted under the name of Time Warner Cable.
Use of EBITA
TWE evaluates operating performance based on several factors, including
its primary financial measure of operating income before noncash amortization
of intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after
charges for depreciation. In addition, EBITA eliminates the uneven effect
across all business segments of considerable amounts of noncash amortization of
intangible assets recognized in business combinations accounted for by the
purchase method. These business combinations, including Time Warner's $14
billion acquisition of Warner Communications Inc. in 1989 and $1.3 billion
acquisition of the minority interest in American Television and Communications
Corporation in 1992, created over $10 billion of intangible assets that
generally are being amortized over a twenty to forty year period. The exclusion
of noncash amortization charges also is consistent with management's belief
that TWE's intangible assets, such as cable television franchises, film and
television libraries and the goodwill associated with its brands, generally are
increasing in value and importance to TWE's business objective of creating,
extending and distributing recognizable brands and copyrights throughout the
world. As such, the following comparative discussion of the results of
operations of TWE includes, among other factors, an analysis of changes in
business segment EBITA. However, EBITA should be considered in addition to, not
as a substitute for, operating income, net income and other measures of
financial performance reported in accordance with generally accepted accounting
principles.
Transactions Affecting Comparability of Results of Operations
The comparability of TWE's operating results has been affected by a
$215 million net pretax gain recognized by TWE in 1999 in connection with the
early termination and settlement of a long-term home video distribution
agreement.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for 1999 should be analyzed after
excluding the effects of this significant nonrecurring gain. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of this unusual item. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
In addition, the comparability of TWE's Cable division results has been
affected by certain cable-related transactions, as described more fully in Note
7 to the accompanying consolidated financial statements. While these
transactions had a significant effect on the comparability of the Cable
division's EBITA and operating income principally due to the deconsolidation of
the related operations, they did not have a significant effect on the
comparability of TWE's net income.
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
Three Months Ended March 31,
Operating
EBITA Income
---------------------- ----------------------
1999 1998 1999 1998
------- ------ ------ ------
(millions)
<S> <C> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(1).............................. $ 346 $119 $ 316 $ 86
Broadcasting-The WB Network....................................... (41) (38) (42) (39)
Cable Networks-HBO................................................ 125 109 125 109
Cable(2).......................................................... 337 307 252 213
---- ---- ----- ----
Total............................................................. $ 767 $497 $ 651 $369
===== ==== ====== ====
</TABLE>
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(1) Includes a net pretax gain of approximately $215 million recognized in 1999
in connection with the early termination and settlement of a long-term home
video distribution agreement.
(2) The comparability of the Cable division's
results has been affected by certain cable-related transactions that
occurred in 1998, as described more fully in Note 7 to the accompanying
consolidated financial statements.
TWE had revenues of $2.934 billion and net income of $312 million for the
three months ended March 31, 1999, compared to revenues of $2.910 billion and
net income of $108 million for the three months ended March 31, 1998.
As discussed more fully below, TWE's net income increased principally
as a result of the inclusion of an approximate $215 million net pretax gain
recognized in 1999 in connection with the early termination and settlement of a
long-term home video distribution agreement. Excluding this gain, TWE's net
income decreased to $97 million in 1999 from $108 million in the prior year.
This decrease principally resulted from higher losses from certain investments
accounted for under the equity method of accounting, which more than offset an
overall increase in business segment operating income.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $28 million and $15 million
for the three months ended March 31, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
FILMED ENTERTAINMENT-WARNER BROS. Revenues increased to $1.380 billion,
compared to $1.310 billion in the first three months of 1998. EBITA increased
to $346 million from $119 million. Operating income increased to $316 million
from $86 million. Revenues benefited from increases in worldwide home video and
theatrical operations, offset in part by lower worldwide television production
and distribution revenues. EBITA and operating income increased primarily from
the inclusion of an approximate $215 million net pretax gain recognized in
connection with the early termination and settlement of a long-term home video
distribution agreement. In addition, EBITA and operating income benefited from
improved results from worldwide theatrical and home video operations and an
increase in investment-related income, offset in part by lower results from
television production, television distribution and consumer products
operations.
BROADCASTING - THE WB NETWORK. Revenues increased to $79 million,
compared to $45 million in the first three months of 1998. EBITA decreased to a
loss of $41 million from a loss of $38 million. Operating losses increased to
$42 million from $39 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of primetime programming
in September 1998. Despite the revenue increase, operating losses increased
because of a lower allocation of losses to a minority partner in the network.
However, excluding this minority interest effect, operating losses improved
principally as a result of the revenue gains, which outweighed higher
programming costs associated with the expanded programming schedule.
CABLE NETWORKS-HBO. Revenues increased to $526 million, compared to
$512 million in the first three months of 1998. EBITA and operating income
increased to $125 million from $109 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, cost savings, one-time gains from the sale of
certain investments and higher income from Comedy Central, a 50%-owned equity
investee, offset in part by higher marketing expenses.
CABLE. Revenues decreased to $1.074 billion, compared to $1.153 billion
in the first three months of 1998. EBITA increased to $337 million from $307
million. Operating income increased to $252 million from $213 million.
The Cable division's 1999 operating results were affected by certain cable-
related transactions that occurred in 1998 (the "1998 Cable Transactions"), as
described more fully in Note 7 to the accompanying consolidated financial
statements. Excluding the effect of the 1998 Cable Transactions, revenues
benefited from an increase in basic cable subscribers, increases in basic cable
rates and an increase in advertising and pay-per-view revenues. Similarly
excluding the effect of the 1998 Cable Transactions, EBITA and operating income
increased principally as a result of the revenue gains, offset in part by the
absence of approximately $14 million of net pretax gains recognized in 1998
relating to the sale or exchange of certain cable television systems.
INTEREST AND OTHER, NET. Interest and other, net, was $225 million in
the first three months of 1999, compared to $164 million in the first three
months of 1998. Interest expense decreased to $137 million, compared to $141
million in the first three months of 1998, principally due to lower average
debt levels. There was other expense, net, of $88 million in the first three
months of 1999, compared to $23 million in the first three months of 1998,
principally due to higher losses from certain investments accounted for under
the equity method of accounting.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1999
Financial Condition
TWE had $6.9 billion of debt, $321 million of cash and equivalents (net
debt of $6.6 billion), $615 million of Time Warner General Partners' Senior
Capital and $5.1 billion of partners' capital at March 31, 1999, compared to
$6.6 billion of debt, $87 million of cash and equivalents (net debt of $6.5
billion), $217 million of preferred stock of a subsidiary, $603 million of Time
Warner General Partners' Senior Capital and $5.1 billion of partners' capital
at December 31, 1998.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Redemption of REIT Preferred Stock
In March 1999, a subsidiary of TWE (the "REIT") redeemed all of its
shares of preferred stock ("REIT Preferred Stock") at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement. Pursuant to its terms, the REIT
Preferred Stock was redeemed as a result of proposed changes to federal tax
regulations that substantially increased the likelihood that dividends paid by
the REIT or interest paid to the REIT under a mortgage note of TWE would not be
fully deductible for federal income tax purposes.
Cash Flows
During the first three months of 1999, TWE's cash provided by operations
amounted to $788 million and reflected $767 million of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $192 million of noncash depreciation expense and $44 million
related to a decrease in working capital requirements, other balance sheet
accounts and noncash items, less $144 million of interest payments, $22 million
of income taxes, $18 million of corporate expenses and $31 million of proceeds
repaid under TWE's asset securitization program. Cash provided by operations of
$441 million in the first three months of 1998 reflected $497 million of EBITA
from its Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable
Networks-HBO and Cable businesses, $243 million of noncash depreciation expense
and $148 million of proceeds provided by TWE's asset securitization program,
less $156 million of interest payments, $20 million of income taxes, $18
million of corporate expense and $253 million related to an increase in working
capital requirements, other balance sheet accounts and noncash items.
Cash used by investing activities was $322 million in the first three
months of 1999, compared to $559 million in the first three months of 1998,
principally as a result of a $183 million decrease in cash used for investments
and acquisitions and a decrease in capital expenditures. Capital expenditures
decreased to $305 million in the first three months of 1999, compared to $352
million in the first three months of 1998.
Cash used by financing activities was $232 million in the first three
months of 1999, compared to $97 million in the first three months of 1998. The
use of cash in 1999 principally resulted from the redemption of REIT Preferred
Stock at an aggregate cost of $217 million and the payment of $154 million of
capital distributions to Time Warner, offset in part by a $157 million increase
in net borrowings. The use of cash in 1998 principally resulted from the
payment of $172 million of capital distributions to Time Warner, offset in part
by a $113 million increase in net borrowings.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its
capital and liquidity needs for the foreseeable future.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Cable Capital Spending
Time Warner Cable has been engaged in a plan to upgrade the technological
capability and reliability of its cable television systems and develop new
services, which it believes will position the business for sustained, long-term
growth. Capital spending by TWE's Cable division amounted to $276 million in
the three months ended March 31, 1999, compared to $326 million in the three
months ended March 31, 1998. For the full year of 1999, cable capital spending
is expected to be comparable to 1998 levels, with approximately $900 million
budgeted for the remainder of 1999. Capital spending by TWE's Cable division is
expected to continue to be funded by cable operating cash flow.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future revenue not
yet recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition, amounted to $2.313 billion at March 31, 1999 (including amounts
relating to TWE's cable television networks of $218 million and to Time
Warner's cable television networks of $584 million), compared to $2.298 billion
at December 31, 1998 (including amounts relating to TWE's cable television
networks of $199 million and to Time Warner's cable television networks of $570
million).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which already have been produced, the
recognition of revenue for such completed product principally is dependent only
upon the commencement of the availability period for telecast under the terms
of the related licensing agreement. Cash licensing fees are collected
periodically over the term of the related licensing agreements or on an
accelerated basis using TWE's $500 million securitization facility. The portion
of backlog for which cash has not already been received has significant off-
balance sheet asset value as a source of future funding. The backlog excludes
advertising barter contracts, which also are expected to result in the future
realization of revenues and cash through the sale of advertising spots received
under such contracts.
Year 2000 Technology Preparedness
TWE, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its
business. Older computer programs, computer hardware and chip-based devices may
fail to recognize dates beginning on January 1, 2000 as being valid dates, and
as a result may fail to operate or may operate improperly when such dates are
introduced.
TWE's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those
dependent on one or more third parties. These technological operations include
information technology ("IT") systems and non-IT systems, including those with
embedded technology, hardware and software. Most of TWE's potential Year 2000
exposures are dependent to some degree on one or more third parties. Failure to
achieve high levels of Year 2000 compliance could have a material adverse
impact on TWE and its financial statements.
The Company's Year 2000 initiative is being conducted at the operational
level by divisional project managers and senior technology executives overseen
by senior divisional executives, with assistance internally as well as from
outside professionals. The progress of each division through the different
phases of remediation--inventorying, assessment, remediation planning,
implementation and final testing--is actively overseen and reviewed on a
regular basis by an executive oversight group.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company has generally completed the process of identifying
potential Year 2000 difficulties in its technological operations, including IT
applications, IT technology and support, desktop hardware and software, non-IT
systems and important third party operations, and distinguishing those that are
"mission critical" from those that are not. An item is considered "mission
critical" if its Year 2000 related failure would significantly impair the
ability of one of the Company's major business units to (1) produce, market and
distribute the products or services that generate significant revenues for that
business, (2) meet its obligations to pay its employees, artists, vendors and
others or (3) meet its obligations under regulatory requirements and internal
accounting controls. The Company and its divisions have identified appro-
ximately 600 worldwide, "mission critical" potential exposures. Of these, as of
March 31, 1999, approximately 50% have been identified by the divisions as Year
2000 compliant, approximately 45% as in the remediation implementation or final
testing stages, approximately 4% as in the remediation planning stage and less
than 2% as in the assessment stage. The Company currently expects that the
assessment phase for the few remaining potential exposures should be completed
during the second quarter of 1999 and that remediation with respect to
approximately 90% of all these identified operations will be substantially
completed in all material respects by the end of the second quarter of 1999.
The Company, however, could experience unexpected delays. The Company is
currently planning to impose a "quiet" period at the beginning of the fourth
quarter of 1999 during which any remaining remediation involving installation
or modification of systems that interface with other systems will be minimized
to permit the Company to conduct testing in a stable environment.
As stated above, however, the Company's business is heavily dependent on
third parties and these parties are themselves heavily dependent on technology.
For example, in a situation endemic to the cable industry, much of the
Company's head-end equipment that controls cable set-top boxes was not Year
2000 compliant. The box manufacturers have been working with cable industry
groups to develop solutions that the Company is installing in its head-end
equipment. It is currently expected that these solutions will be substantially
implemented by the end of the second quarter of 1999. In addition, if a
television broadcaster or cable programmer encounters Year 2000 problems that
impede its ability to deliver its programming, the Company will be unable to
provide that programming to its cable customers. Because the Company is also a
programming supplier, third-party signal delivery problems would affect its
ability to deliver its programming to its customers. The Company has attempted
to include in its "mission critical" inventory such significant service
providers, vendors, suppliers, customers and governmental entities that are
believed to be critical to business operations and is in various stages of
ascertaining their state of Year 2000 readiness through various means,
including questionnaires, interviews, on-site visits, system interface testing
and industry group participation. The Company continues to monitor these
situations. Moreover, TWE is dependent, like all large companies, on the
continued functioning, domestically and internationally, of basic, heavily
computerized services such as banking, telephony, water and power, and various
distribution mechanisms ranging from the mail, railroads and trucking to high-
speed data transmission. TWE is taking steps to attempt to satisfy itself that
the third parties on which it is heavily reliant are Year 2000 compliant, are
developing satisfactory contingency plans or that alternate means of meeting
its requirements are available, but cannot predict the likelihood of such
compliance nor the direct or indirect costs to the Company of non-compliance by
those third parties or of securing such services from alternate compliant third
parties. In areas in which the Company is uncertain about the anticipated Year
2000 readiness of a significant third party, the Company is investigating
available alternatives, if any.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company currently estimates that the aggregate cost of its Year 2000
remediation program, which started in 1996, will be approximately $50 to $85
million, of which an estimated 50% to 60% has been incurred through March 31,
1999. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT
systems and their implementation and testing. The Company anticipates that its
remediation program, and related expenditures, may continue into 2001 as
temporary solutions to Year 2000 problems are replaced with upgraded equipment.
These expenditures have been and are expected to continue to be funded from the
Company's operating cash flow and have not and are not expected to impact
materially the Company's financial statements.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, the Company has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. In the event that the Company does not complete any of its currently
planned additional remediation prior to the Year 2000, management believes that
the Company could experience significant difficulty in producing and delivering
its products and services and conducting its business in the Year 2000 as it
has in the past. In addition, disruptions experienced by third parties with
which the Company does business as well as by the economy generally could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
The Company has been focusing its efforts on identification and
remediation of its Year 2000 exposures and is beginning to develop specific
contingency plans in the event it does not successfully complete its remaining
remediation as anticipated or experiences unforeseen problems. The Company is
also examining its existing standard business interruption strategies to
evaluate whether they would satisfactorily meet the demands of failures arising
from Year-2000 related problems. The Company intends to examine its status
periodically to determine the necessity of establishing and implementing such
contingency plans or additional strategies, which could involve, among other
things, manual workarounds, adjusting staffing strategies and sharing resources
across divisions.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document,
together with management's public commentary related thereto, contains such
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, EBITA and cash flow. Words such as "anticipate,"
"estimate," "expects," "projects," "intends," "plans," "believes" and words and
terms of similar substance used in connection with any discussion of future
operating or financial performance identify such forward-looking statements.
Those forward-looking statements are management's present expectations of
future events. As with any projection or forecast, they are inherently
susceptible to uncertainty and changes in circumstances, and TWE is under no
obligation to (and expressly disclaims any such obligation to) update or alter
its forward-looking statements whether as a result of such changes, new
information, future events or otherwise.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
TWE operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. TWE's actual results could
differ materially from management's expectations because of changes in such
factors. Some of the other factors that also could cause actual results to
differ from those contained in the forward-looking statements include those
identified in TWE's other filings and:
. For TWE's cable business, more aggressive than expected competition
from new technologies and other types of video programming distributors,
including DBS; increases in government regulation of cable or equipment
rates or other terms of service (such as "digital must-carry" or
"unbundling" requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as high-speed on-line services or telephony over cable or
video on demand) to function properly, to appeal to enough consumers or to
be available at reasonable prices and to be delivered in a timely fashion;
and greater than expected increases in programming or other costs.
. For TWE's cable programming and television businesses, greater than
expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer
viewership due to an increased number of programming services or the
increased popularity of alternatives to television.
. For TWE's film and television businesses, their ability to continue
to attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and entertainment time (and its possible negative effects on the broadcast
and cable networks, which are significant customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
. The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in
the implementation of the Company's remediation plans and the ability of
third parties to address adequately their own Year 2000 issues.
In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in TWE's plans, strategies and
intentions.
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<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1999 1998
---------- ------------
(millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents........................................................................ $ 321 $ 87
Receivables, including $512 and $765 million due from Time Warner, less allowances
of $477 and $506 million................................................................ 2,423 2,618
Inventories................................................................................. 1,191 1,312
Prepaid expenses............................................................................ 188 166
----- ------
Total current assets........................................................................ 4,123 4,183
Noncurrent inventories...................................................................... 2,353 2,327
Loan receivable from Time Warner............................................................ 400 400
Investments................................................................................. 1,070 886
Property, plant and equipment, net.......................................................... 6,185 6,041
Cable television franchises................................................................. 3,898 3,773
Goodwill.................................................................................... 3,828 3,854
Other assets................................................................................ 675 766
------- ------
Total assets................................................................................ $22,532 $22,230
======= =======
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable............................................................................ $ 1,297 $ 1,473
Participations and programming costs payable................................................ 1,464 1,515
Debt due within one year.................................................................... 6 6
Other current liabilities, including $392 and $370 million due to Time Warner............... 2,051 1,942
------- ------
Total current liabilities................................................................... 4,818 4,936
Long-term debt.............................................................................. 6,921 6,578
Other long-term liabilities, including $1.309 and $1.130 billion due to Time Warner......... 3,440 3,267
Minority interests.......................................................................... 1,623 1,522
Preferred stock of subsidiary holding solely a mortgage note of its parent.................. - 217
Time Warner General Partners' Senior Capital................................................ 615 603
Partners' Capital
Contributed capital......................................................................... 7,341 7,341
Undistributed partnership earnings (deficit)................................................ (2,226) (2,234)
-------- ------
Total partners' capital..................................................................... 5,115 5,107
------ ------
Total liabilities and partners' capital..................................................... $ 22,532 $ 22,230
====== ======
See accompanying notes.
</TABLE>
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Revenues (a)................................................................................ $2,934 $2,910
------ ------
Cost of revenues (a)(b)..................................................................... 1,704 1,946
Selling, general and administrative (a)(b).................................................. 579 595
----- -----
Operating expenses.......................................................................... 2,283 2,541
------ ------
Business segment operating income........................................................... 651 369
Interest and other, net (a)................................................................. (225) (164)
Minority interest........................................................................... (68) (64)
Corporate services (a)...................................................................... (18) (18)
------ -----
Income before income taxes.................................................................. 340 123
Income taxes................................................................................ (28) (15)
------ -----
Net income.................................................................................. $ 312 $ 108
====== ======
- ---------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the three months ended
March 31, 1999 and 1998, respectively: revenues-$120 million and $129
million; cost of revenues-$(78) million and $(38) million; selling, general
and administrative-$(4) million and $1 million; interest and other, net-$20
million and $2 million; and corporate services-$(18) million in both
periods.
(b) Includes depreciation and amortization expense of:...................................... $308 $371
==== ====
See accompanying notes.
</TABLE>
-12-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income.................................................................................. $ 312 $ 108
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................................... 308 371
Changes in operating assets and liabilities................................................. 168 (38)
----- -----
Cash provided by operations................................................................. 788 441
----- -----
INVESTING ACTIVITIES
Investments and acquisitions................................................................ (47) (230)
Capital expenditures........................................................................ (305) (352)
Investment proceeds......................................................................... 30 23
----- -----
Cash used by investing activities........................................................... (322) (559)
----- -----
FINANCING ACTIVITIES
Borrowings.................................................................................. 1,160 489
Debt repayments............................................................................. (1,003) (376)
Redemption of preferred stock of subsidiary................................................. (217) -
Capital distributions....................................................................... (154) (172)
Other....................................................................................... (18) (38)
----- -----
Cash used by financing activities........................................................... (232) (97)
----- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. 234 (215)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 87 322
----- -----
CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $ 321 $ 107
====== ======
See accompanying notes.
</TABLE>
-13-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................................................. $5,107 $6,333
Net income.................................................................................. 312 108
Other comprehensive income (loss)........................................................... 41 (14)
----- ------
Comprehensive income........................................................................ 353 94
Distributions............................................................................... (333) (277)
Allocation of income to Time Warner General Partners' Senior Capital........................ (12) (22)
------ ------
BALANCE AT END OF PERIOD.................................................................... $5,115 $6,128
====== ======
See accompanying notes.
</TABLE>
-14-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), classifies its business interests into three fundamental areas: CABLE
NETWORKS, consisting principally of interests in cable television programming;
ENTERTAINMENT, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and CABLE, consisting
principally of interests in cable television systems.
Each of the business interests within Cable Networks, Entertainment and
Cable is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) HBO and Cinemax,
the leading pay television services, (2) the unique and extensive film,
television and animation libraries of Warner Bros. and trademarks such as the
LOONEY TUNES characters and BATMAN, (3) The WB Network, a national broadcasting
network launched in 1995 as an extension of the Warner Bros. brand and as an
additional distribution outlet for Warner Bros.' collection of children's
cartoons and television programming, and (4) Time Warner Cable, currently the
largest operator of cable television systems in the U.S.
The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 7). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the
minority interest in American Television and Communications Corporation ("ATC")
in 1992, a portion of which cost was allocated to TWE upon the capitalization
of the partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $116 million and $128 million in the three months ended
March 31, 1999 and 1998, respectively.
Time Warner and certain of its wholly owned subsidiaries collectively
own general and limited partnership interests in TWE consisting of 74.49% of
the pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the senior priority capital ("Senior
Capital") and junior priority capital ("Series B Capital"). The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of MediaOne Group, Inc. ("MediaOne").
Certain of Time Warner's subsidiaries are the general partners of TWE ("Time
Warner General Partners").
-15-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Basis of Presentation
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles applicable to
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
included in its Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K"). Certain reclassifications have been made to the prior
year's financial statements to conform to the 1999 presentation.
2. GAIN ON TERMINATION OF MGM VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, which has been included in operating income in the
accompanying consolidated statement of operations.
3. INVESTMENT IN PRIMESTAR
TWE owns an approximate 24% equity interest in Primestar, Inc.
("Primestar"). In the fourth quarter of 1998, TWE recorded a charge of
approximately $210 million principally to reduce the carrying value of its
interest in Primestar to fair value.
In January 1999, Primestar, an indirect wholly owned subsidiary of
Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was entered into with DirecTV, pursuant to which
DirecTV agreed to purchase Primestar's rights with respect to the use or
acquisition of certain high-power satellites from a wholly owned subsidiary of
one of the stockholders of Primestar.
In April 1999, Primestar closed on the sale of its medium-power direct
broadcast satellite business to DirecTV. The final terms of this medium-power
transaction confirmed the decline in value of TWE's interest in Primestar
recognized in 1998. The closing of the sale of Primestar's high-power satellite
rights to DirecTV is expected to occur in the second quarter of 1999, subject
to customary closing conditions, including all necessary governmental and
regulatory approvals. There can be no assurance that such approvals will be
obtained and that this high-power transaction will be consummated.
During the period in which Primestar's operations are being wound down,
TWE continues to recognize its share of losses of Primestar under the equity
method of accounting. Such losses are included in interest and other, net, in
TWE's consolidated statement of operations.
-16-
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. INVENTORIES
TWE's inventories consist of:
March 31, 1999 December 31, 1998
-------------- -----------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization..................................... $ 612 $ 782 $ 614 $ 744
Completed and not released...................................... 73 22 179 76
In process and other............................................ 25 628 23 572
Library, less amortization...................................... - 547 - 560
Programming costs, less amortization............................... 406 374 426 375
Merchandise........................................................ 75 - 70 -
----- ------ ---- ------
Total.............................................................. $1,191 $2,353 $1,312 $2,327
====== ====== ====== ======
</TABLE>
5. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of TWE
(the "REIT") issued 250,000 shares of preferred stock ("REIT Preferred Stock").
The REIT was intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
In March 1999, the REIT redeemed all of its shares of REIT Preferred Stock
at an aggregate cost of $217 million, which approximated net book value. The
redemption was funded with borrowings under TWE's bank credit agreement.
Pursuant to its terms, the REIT Preferred Stock was redeemed as a result of
proposed changes to federal tax regulations that substantially increased the
likelihood that dividends paid by the REIT or interest paid to the REIT under a
mortgage note of TWE would not be fully deductible for federal income tax
purposes.
6. PARTNERS' CAPITAL
TWE is required to make distributions to reimburse the partners for income
taxes at statutory rates based on their allocable share of taxable income, and
to reimburse Time Warner for stock options granted to employees of TWE based on
the amount by which the market price of Time Warner Inc. common stock exceeds
the option exercise price on the exercise date or, with respect to options
granted prior to the TWE capitalization on June 30, 1992, the greater of the
exercise price or the $13.88 market price of Time Warner Inc. common stock at
the time of the TWE capitalization. TWE accrues a stock option distribution and
a corresponding liability with respect to unexercised options when the market
price of Time Warner Inc. common stock increases during the accounting period,
and reverses previously accrued stock option distributions and the correspon-
ding liability when the market price of Time Warner Inc. common stock declines.
-17-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
During the three months ended March 31, 1999, TWE accrued $67 million of
tax-related distributions and $266 million of stock option distributions, based
on closing prices of Time Warner Inc. common stock of $70.81 at March 31, 1999
and $62.06 at December 31, 1998. During the three months ended March 31, 1998,
TWE accrued $52 million of tax-related distributions and $225 million of stock
option distributions as a result of an increase at that time in the market
price of Time Warner Inc. common stock. During the three months ended March 31,
1999, TWE paid distributions to the Time Warner General Partners in the amount
of $154 million, consisting of $67 million of tax-related distributions and $87
million of stock option related distributions. During the three months ended
March 31, 1998, TWE paid the Time Warner General Partners distributions in the
amount of $172 million, consisting of $52 million of tax-related distributions
and $120 million of stock option related distributions.
7. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas: CABLE
NETWORKS, consisting principally of interests in cable television programming;
ENTERTAINMENT, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and CABLE, consisting
principally of interests in cable television systems.
Information as to the operations of TWE in different business segments is
set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ("EBITA"). The operating results of TWE's cable segment
reflect: (i) the transfer of Time Warner Cable's direct broadcast satellite
operations to Primestar, effective as of April 1, 1998, (ii) the formation of
the Road Runner joint venture to operate and expand Time Warner Cable's and
MediaOne's existing high-speed online businesses, effective as of June 30,
1998, (iii) the reorganization of Time Warner Cable's business telephony
operations into a separate entity named Time Warner Telecom LLC, effective as
of July 1, 1998 and (iv) the formation of a joint venture in Texas that owns
cable television systems serving approximately 1.1 million subscribers,
effective as of December 31, 1998 (collectively, the "1998 Cable Trans-
actions"). These transactions are described more fully in TWE's 1998 Form 10-K.
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Revenues
Filmed Entertainment-Warner Bros............................................................ $ 1,380 $1,310
Broadcasting-The WB Network................................................................. 79 45
Cable Networks-HBO.......................................................................... 526 512
Cable....................................................................................... 1,074 1,153
Intersegment elimination.................................................................... (125) (110)
------- ------
Total....................................................................................... $ 2,934 $2,910
======= ======
</TABLE>
-18-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C> <C>
EBITA(1)
Filmed Entertainment-Warner Bros(2)......................................................... $346 $119
Broadcasting-The WB Network................................................................. (41) (38)
Cable Networks-HBO.......................................................................... 125 109
Cable....................................................................................... 337 307
---- ----
Total....................................................................................... $767 $497
==== ====
- ---------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, TWE's business segment operating income for the three
months ended March 31, 1999 and 1998 was $651 million and $369 million,
respectively.
(2) Includes a net pretax gain of approximately $215 million recognized in
1999 in connection with the early termination and settlement of a long-
term home video distribution agreement.
</TABLE>
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros............................................................ $ 29 $ 40
Broadcasting-The WB Network................................................................. - -
Cable Networks-HBO.......................................................................... 7 5
Cable....................................................................................... 156 198
---- ----
Total....................................................................................... $192 $243
==== ====
</TABLE>
<TABLE>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Amortization of Intangible Assets(1)
Filmed Entertainment-Warner Bros............................................................ $ 30 $ 33
Broadcasting-The WB Network................................................................. 1 1
Cable Networks-HBO.......................................................................... - -
Cable....................................................................................... 85 94
---- -----
Total....................................................................................... $116 $128
==== ====
_______________
(1)Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including Time Warner's $14 billion
acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
interest in ATC in 1992.
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
TWE is subject to numerous legal proceedings. In management's opinion and
considering established reserves, the resolution of these matters will not have
a material effect, individually and in the aggregate, on TWE's consolidated
financial statements.
-19-
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Interest expense............................................................................ $137 $141
Cash payments made for interest............................................................. 144 156
Cash payments made for income taxes, net.................................................... 22 20
Noncash capital distributions............................................................... 266 225
Noncash investing activities in the first three months of 1998 included
the transfer of cable television systems (or interests therein) serving
approximately 650,000 subscribers that were formerly owned by subsidiaries of
Time Warner to the TWE-Advance/Newhouse Partnership, subject to approximately
$1 billion of debt, in exchange for common and preferred partnership interests
therein, as well as certain related transactions (collectively, the "TWE-A/N
Transfers"). For a more comprehensive description of the TWE-A/N Transfers, see
TWE's 1998 Form 10-K.
</TABLE>
-20-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner
Companies, Inc. ("TW Companies") contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW Companies's Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time
Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), for
general partnership interests, and each general partner guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest based on the
relative fair value of the net assets each contributed to TWE (the "General
Partner Guarantees"). Since then, eleven of the thirteen original general
partners have been merged or dissolved into the other two. Warner Communi-
cations Inc. ("WCI") and American Television and Communications Corporation
("ATC") are the two remaining general partners of TWE. They have succeeded to
the general partnership interests and have assumed the General Partner
Guarantees of the eleven former general partners.
Set forth below is a discussion of the results of operations and financial
condition of WCI, the only General Partner with independent business
operations. WCI conducts substantially all of TW Companies's Music operations,
which include copyrighted music from many of the world's leading recording
artists that is produced and distributed by a family of established record
labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment
and Warner Music International. The financial position and results of
operations of ATC are principally derived from its investments in TWE, TW
Companies, Turner Broadcasting System, Inc. and Time Warner Telecom LLC, and
its revolving credit agreement with TW Companies. Capitalized terms are as
defined and described in the accompanying consolidated financial statements,
or elsewhere herein.
Use of EBITA
WCI evaluates operating performance based on several factors, including
its primary financial measure of operating income before noncash amortization
of intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after
charges for depreciation. The exclusion of noncash amortization charges is
consistent with management's belief that WCI's intangible assets, such as music
catalogues and copyrights and the goodwill associated with its brands,
generally are increasing in value and importance to WCI's business objective
of creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of WCI includes, among other factors, an analysis of
changes in business segment EBITA. However, EBITA should be considered in
addition to, not as a substitute for, operating income, net income and other
measures of financial performance reported in accordance with generally
accepted accounting principles.
RESULTS OF OPERATIONS
WCI had revenues of $936 million and net income of $118 million for the
three months ended March 31, 1999, compared to revenues of $888 million and net
income of $42 million for the three months ended March 31, 1998. EBITA
increased to $94 million from $92 million. Operating income increased to $31
million from $28 million. Revenues benefited from an increase in domestic and
international recorded music sales principally relating to higher compact disc
sales of a broad range of popular releases from new and established artists,
offset in part by lower music publishing revenues. EBITA and operating income
increased principally as a result of the revenue gains, offset in part by lower
licensing income from direct-marketing activities.
-21-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
WCI's equity in the pretax income of TWE was $202 million for the three
months ended March 31, 1999, compared to $73 million for the three months ended
March 31, 1998. TWE's pretax income increased in 1999 as compared to 1998
principally as a result of the inclusion of an approximate $215 million net
gain recognized in 1999 in connection with the early termination and settlement
of a long-term home video distribution agreement. Excluding this gain, TWE's
pretax income increased to $125 million in 1999 from $123 million in the prior
year. This increase principally resulted from an overall increase in business
segment operating income, offset in part by higher losses from certain
investments accounted for under the equity method of accounting.
Interest and other, net was $4 million of income for the three months
ended March 31, 1999, compared to $1 million of expense for the three months
ended March 31, 1998. Interest expense was $4 million in 1999 and 1998. There
was other income, net, of $8 million in 1999, compared to other income, net,
of $3 million in 1998, principally because of an increase in interest income,
offset in part by higher losses from certain investments accounted for under
the equity method of accounting.
The relationship between income before income taxes and income tax expense
for the General Partners is principally affected by the amortization of good-
will and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense for each of the General Partners
includes all income taxes related to its allocable share of partnership income
and its equity in the income tax expense of corporate subsidiaries of TWE.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1999
Financial Condition
WCI had $7.4 billion of equity at March 31, 1999, compared to $7.7 billion
of equity at December 31, 1998. Cash and equivalents decreased to $95 million
at March 31, 1999, compared to $160 million at December 31, 1998. WCI had no
long-term debt due to TW Companies under its revolving credit agreement at the
end of either period.
ATC had $1.5 billion of equity at March 31, 1999 and at December 31, 1998.
Although ATC has no independent operations, it is expected that additional
tax-related and other distributions from TWE, as well as availability under
ATC's revolving credit agreement with TW Companies, will continue to be
sufficient to satisfy ATC's obligations with respect to its tax sharing
agreement with TW Companies for the foreseeable future.
-22-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Cash Flows
In the first three months of 1999, WCI's cash provided by operations
amounted to $266 million and reflected $94 million of EBITA, $17 million of
noncash depreciation expense, $91 million of distributions from TWE, $125
million of proceeds received under WCI's asset securitization program and $56
million related to a decrease in working capital requirements, other balance
sheet accounts and noncash items, less $3 million of interest payments and $114
million of income taxes ($85 million of which was paid to TW Companies under a
tax sharing agreement). Cash provided by WCI's operations of $164 million in
the first three months of 1998 reflected $92 million of EBITA, $19 million of
noncash depreciation expense, $102 million of distributions from TWE and $144
million related to a decrease in working capital requirements, other balance
sheet accounts and noncash items, less $1 million of interest payments, $46
million of income taxes ($35 million of which was paid to TW Companies under a
tax sharing agreement) and $146 million of proceeds repaid under WCI's asset
securitization program.
Cash used by investing activities was $36 million in the first three
months of 1999, compared to cash provided by investing activities of $32
million in the first three months of 1998, principally as a result of a
decrease in investment proceeds and an increase in capital spending.
Cash used by financing activities was $295 million in the first three
months of 1999, compared to $147 million in the first three months of 1998,
principally as a result of an increase in advances to TW Companies, offset by
lower dividend payments.
Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with TW Companies are
sufficient to fund its capital and liquidity needs for the foreseeable future
without cash distributions from TWE above those permitted by existing
agreements.
WCI and ATC have no claims on the assets and cash flows of TWE except
through the payment of certain reimbursements and cash distributions. During
the three months ended March 31, 1999, the General Partners received an
aggregate $154 million of distributions from TWE, consisting of $67 million of
tax-related distributions and $87 million of stock option related distri-
butions. During the three months ended March 31, 1998, the General Partners
received an aggregate $172 million of distributions, consisting of $52 million
of tax-related distributions and $120 million of stock option related distri-
butions. Of such aggregate distributions in the first three months of 1999 and
1998, WCI received $91 million and $102 million, respectively, and ATC received
$63 million and $70 million, respectively.
Year 2000 Technology Preparedness
WCI, together with TWE and like most large companies, depends on many
different computer systems and other chip-based devices for the continuing
conduct of its business. Older computer programs, computer hardware and
chip-based devices may fail to recognize dates beginning on January 1, 2000 as
being valid dates, and as a result may fail to operate or may operate
improperly when such dates are introduced.
WCI's exposure to potential Year 2000 problems arises both in technolo-
gical operations under the control of WCI and in those dependent on one or more
third parties. These technological operations include information technology
("IT")systems and non-IT systems, including those with embedded technology,
hardware and software. Most of WCI's potential Year 2000 exposures are
dependent to some degree on one or more third parties. Failure to achieve high
levels of Year 2000 compliance could have a material adverse impact on WCI and
its financial statements.
-23-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
WCI's Year 2000 project has several phases: inventorying, assessment,
remediation planning, implementation and final testing. WCI's progress through
these phases is actively overseen by a senior technology executive who reports
on a regular basis to the senior financial executive. Assistance is obtained,
when appropriate, from both internal and outside professional sources.
WCI has generally completed the process of identifying potential Year 2000
difficulties in its technological operations, including IT applications, IT
technology and support, desktop hardware and software, non-IT systems and
important third party operations, and distinguishing those that are "mission
critical" from those that are not. An item is considered "mission critical" if
its Year 2000-related failure would significantly impair the ability of one of
WCI's major business units to (1) produce, market and distribute the products
or services that generate significant revenues for that business, (2) meet its
obligations to pay its employees, artists, vendors and others or (3) meet its
obligations under regulatory requirements and internal accounting controls. WCI
has identified approximately 200 worldwide, "mission critical" potential
exposures. Of these, as of March 31, 1999, approximately 65% have been
identified as Year 2000 compliant and the remaining 35% as in the remediation
implementation or final testing stages. WCI currently expects that remediation
with respect to approximately 95% of all these identified operations will be
substantially completed in all material respects by the end of the second
quarter of 1999. WCI, however, could experience unexpected delays. WCI is
currently planning to impose a "quiet" period at the beginning of the fourth
quarter of 1999 during which any remaining remediation involving installation
or modification of systems that interface with other systems will be minimized
to permit WCI to conduct testing in a stable environment.
As stated above, however, WCI's business is dependent on third parties and
these parties are themselves dependent on technology. In some cases, WCI's
third party dependence is on vendors of technology who are themselves working
toward solutions to Year 2000 problems. WCI has attempted to include in its
"mission critical" inventory significant service providers, vendors, suppliers,
customers and governmental entities that are believed to be critical to
business operations and is in various stages of ascertaining their state of
Year 2000 readiness through various means, including questionnaires, inter-
views, on-site visits, system interface testing and industry group
participation. WCI continues to monitor these situations. Moreover, WCI is
dependent, like all large companies, on the continued functioning, domestically
and internationally, of basic, heavily computerized services such as banking,
telephony, water and power, and various distribution mechanisms ranging from
the mail, railroads and trucking to high-speed data transmission. WCI is taking
steps to attempt to satisfy itself that the third parties on which it is
heavily reliant are Year 2000 compliant, are developing satisfactory
contingency plans or that alternate means of meeting its requirements are
available, but cannot predict the likelihood of such compliance nor the direct
or indirect costs to WCI of non-compliance by those third parties or of
securing such services from alternate compliant third parties. In areas in
which WCI is uncertain about the anticipated Year 2000 readiness of a
significant third party, WCI is investigating available alternatives, if any.
WCI currently estimates that the aggregate cost of its Year 2000
remediation program, which started in 1996, will be approximately $25 to $40
million, of which an estimated 40% to 50% has been incurred through March 31,
1999. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT
systems and their implementation and testing. WCI anticipates that its
remediation program, and related expenditures, may continue into 2001 as
temporary solutions to Year 2000 problems are replaced with upgraded equipment.
These expenditures have been and are expected to continue to be funded from
WCI's operating cash flow and have not and are not expected to impact
materially WCI's financial statements.
-24-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
In addition to the foregoing areas, WCI is also exposed to potential Year
2000 problems encountered by TWE in technological operations under its control
and those dependent on one or more third parties. ATC, while not having any
independent operations, is similarly exposed to potential Year 2000 problems
encountered by TWE. Although WCI and ATC anticipate that TWE will successfully
complete its efforts to be Year 2000 compliant in all material respects in
advance of January 1, 2000, failure by TWE to achieve high levels of Year 2000
compliance could have a material adverse impact on WCI and ATC. For a
discussion of TWE's Year 2000 technology preparedness, see TWE's Management's
Discussion and Analysis of Results of Operations and Financial Condition
included elsewhere herein.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner.
As noted above, however, WCI has not yet completed all phases of its program
and is dependent on third parties whose progress is not within its control.
In the event that WCI does not complete any of its currently planned additional
remediation prior to the Year 2000, management believes that WCI could
experience significant difficulty in producing and delivering its products and
services and conducting its business in the Year 2000 as it has in the past. In
addition, disruptions experienced by third parties with which WCI does business
as well as by the economy generally could also materially adversely affect WCI.
The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
WCI has been focusing its efforts on identification and remediation of its
Year 2000 exposures and is beginning to develop specific contingency plans in
the event it does not successfully complete its remaining remediation as
anticipated or experiences unforeseen problems. WCI is also examining its
existing standard business interruption strategies to evaluate whether they
would satisfactorily meet the demands of failures arising from Year 2000-
related problems. WCI intends to examine its status periodically to determine
the necessity of establishing and implementing such contingency plans or
additional strategies, which could involve, among other things, manual
workarounds, adjusting staffing strategies and sharing resources across
divisions.
The discussion of WCI's expectations with respect to its Year 2000
remediation plans is based on management's current expectations of future
events. As with any projection, it is inherently susceptible to changes in
circumstances. WCI's actual results could differ materially from management's
expectations as a result of such factors as the ability of WCI and its key
service providers, vendors, suppliers, customers and governmental entities to
replace, modify or upgrade computer systems in ways that adequately address the
Year 2000 issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in the
implementation of WCI's remediation plans and the ability of third parties to
adequately address their own Year 2000 issues.
-25-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
WCI ATC
--------------------------- ---------------------------
March 31, December 31, March 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.................................. $ 95 $ 160 $ - $ -
Receivables, less allowances of $254 and
$278 million....................................... 875 1,454 - -
Inventories........................................... 144 151 - -
Prepaid expenses...................................... 722 670 - -
------ ------ ------ -----
Total current assets.................................. 1,836 2,435 - -
Investments in and amounts due to and from TWE........ 1,975 1,632 1,582 1,494
Investments in TW Companies........................... 103 103 61 61
Other investments..................................... 1,352 1,350 402 404
Music catalogues, contracts and copyrights............ 851 876 - -
Goodwill.............................................. 3,478 3,509 - -
Other assets, primarily property, plant and
equipment.......................................... 434 443 - -
------ ------ ------- -----
Total assets.......................................... $10,029 $10,348 $2,045 $1,959
======= ======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts and royalties payable........................ $ 1,025 $ 1,079 $ - $ -
Other current liabilities............................. 481 548 - -
------ ------ ------ -----
Total current liabilities............................. 1,506 1,627 - -
Long-term liabilities, including $776, $670, $550
and $477 million, respectively, due to TW
Companies.......................................... 1,112 1,020 550 477
Shareholders' Equity
Common stock.......................................... 1 1 1 1
Preferred stock of WCI, $.01 par value, 90,000
shares outstanding and $90 million liquidation
preference......................................... - - - -
Paid-in capital....................................... 10,195 10,195 2,523 2,523
Accumulated deficit................................... (50) (1) (379) (360)
------- ------- ----- -----
10,146 10,195 2,145 2,164
Due from TW Companies, net............................ (2,149) (1,908) (314) (346)
Reciprocal interest in TW Companies stock............. (586) (586) (336) (336)
------- ------ ----- ------
Total shareholders' equity............................ 7,411 7,701 1,495 1,482
------- ------ ------ ------
Total liabilities and shareholders' equity............ $10,029 $10,348 $2,045 $1,959
======= ======= ====== ======
See accompanying notes.
</TABLE>
-26-
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
<TABLE>
WCI ATC
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $936 $888 $ - $ -
---- ---- ----- -----
Cost of revenues (a)(b)............................................ 543 576 - -
Selling, general and administrative (a)(b)......................... 362 284 - -
---- ---- ----- -----
Operating expenses................................................. 905 860 - -
---- ---- ----- -----
Business segment operating income.................................. 31 28 - -
Equity in pretax income of TWE (a)................................. 202 73 138 50
Interest and other, net (a)........................................ 4 (1) 4 5
---- ----- ---- ----
Income before income taxes......................................... 237 100 142 55
Income taxes (a)................................................... (119) (58) (61) (27)
---- ----- ---- ----
Net income......................................................... $118 $ 42 $ 81 $ 28
==== ==== ==== =====
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General
Partners:
Revenues........................................................... $ 64 $ 48 $ - $ -
Cost of revenues................................................... (5) (9) - -
Selling, general and administrative................................ (1) 3 - -
Equity in pretax income of TWE..................................... (16) (9) - -
Interest and other, net............................................ 30 8 - -
Income taxes....................................................... (85) (35) (50) (21)
(b) Includes depreciation and amortization expense of:.......... $ 80 $ 83 $ - $ -
==== ==== ==== ====
See accompanying notes.
</TABLE>
-27-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
WCI ATC
--------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
OPERATIONS
Net income......................................................... $118 $ 42 $ 81 $ 28
Adjustments for noncash and nonoperating items:
Depreciation and amortization...................................... 80 83 - -
Excess (deficiency) of distributions over equity in pretax income
of TWE........................................................ (111) 29 (75) 20
Equity in losses (income) of other investee companies after
distributions................................................. (2) 8 1 2
Changes in operating assets and liabilities........................ 181 2 (4) -
---- ---- ----- -----
Cash provided by operations........................................ 266 164 3 50
---- ---- ----- -----
INVESTING ACTIVITIES
Investments and acquisitions....................................... (9) (11) - -
Capital expenditures............................................... (27) (20) - -
Investment proceeds................................................ - 63 - -
----- ---- ----- -----
Cash provided (used) by investing activities....................... (36) 32 - -
---- ---- ----- -----
FINANCING ACTIVITIES
Dividends.......................................................... (54) (73) (35) (49)
Decrease (increase) in amounts due from TW Companies, net.......... (241) (74) 32 (1)
---- ---- ---- -----
Cash used by financing activities.................................. (295) (147) (3) (50)
---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................ (65) 49 - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................ 160 102 - -
---- ---- ----- -----
CASH AND EQUIVALENTS AT END OF PERIOD.............................. $ 95 $151 $ - $ -
==== ==== ==== ====
See accompanying notes.
</TABLE>
-28-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31,
(Unaudited)
WCI ATC
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD..................................... $7,701 $8,521 $1,482 $2,087
Net income......................................................... 118 42 81 28
Other comprehensive income (loss).................................. (7) (18) 8 (4)
------ ----- ----- -----
Comprehensive income (loss)........................................ 111 24 89 24
Increase in stock option distribution liability to
TW Companies(a)................................................. (158) (133) (108) (92)
Dividends.......................................................... (2) (2) - -
Transfers to TW Companies, net..................................... (241) (74) 32 (1)
----- ------ ----- ------
BALANCE AT END OF PERIOD........................................... $7,411 $8,336 $1,495 $2,018
====== ====== ====== ======
- ------------------
(a)The General Partners record distributions to TW Companies and a correspo-
nding receivable from TWE as a result of the stock option related distribu-
tion provisions of the TWE partnership agreement. Stock option distributions
of $158 million and $133 million for WCI and $108 million and $92 million
for ATC were accrued in the first three months of 1999 and 1998, respec-
tively, because of an increase in the market price of Time Warner common
stock (Note 2).
See accompanying notes.
</TABLE>
-29-
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner
Companies, Inc. ("TW Companies") contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW Companies's Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time
Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), for
general partnership interests, and each general partner guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest based on the
relative fair value of the net assets each contributed to TWE (the "General
Partner Guarantees," see Note 3). Since then, eleven of the thirteen original
general partners have been merged or dissolved into the other two. Warner
Communications Inc. ("WCI") and American Television and Communications
Corporation ("ATC") are the two remaining general partners of TWE. They have
succeeded to the general partnership interests and have assumed the General
Partner Guarantees of the eleven former general partners. WCI, ATC and, where
appropriate, the former general partners are referred to herein as the "General
Partners."
WCI conducts substantially all of TW Companies's Music operations,
which include copyrighted music from many of the world's leading recording
artists that is produced and distributed by a family of established record
labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment
and Warner Music International. ATC does not conduct operations independent of
its ownership interests in TWE and certain other investments.
Basis of Presentation
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles applicable to
interim periods. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the General
Partners included in TWE's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K"). Certain reclassifications have been
made to the prior year's financial statements to conform to the 1999
presentation.
2. TWE
The General Partners' investment in and amounts due to and from TWE at
March 31, 1999 and December 31, 1998 consists of the following:
<TABLE>
March 31, 1999 WCI ATC
- -------------- --- ---
(millions)
<S> <C> <C>
Investment in TWE........................................................................... $1,478 $1,049
Stock option related distributions due from TWE............................................. 776 533
Other net liabilities due to TWE, principally related to home video distribution............ (279) -
------ -----
Total....................................................................................... $1,975 $1,582
====== ======
</TABLE>
-30-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
December 31, 1998 WCI ATC
- ----------------- --- ---
(millions)
<S> <C> <C>
Investment in TWE........................................................................... $1,457 $1,034
Stock option related distributions due from TWE............................................. 670 460
Other net liabilities due to TWE, principally related to home video distribution............ (495) -
----- -------
Total....................................................................................... $1,632 $1,494
====== ======
</TABLE>
Partnership Structure and Allocation of Income
TWE was capitalized on June 30, 1992 to own and operate substantially all
of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable
businesses previously owned by the General Partners. The General Partners in
the aggregate hold, directly or indirectly, 63.27% of the pro rata priority
capital ("Series A Capital") and residual equity capital ("Residual Capital")
of TWE and 100% of the senior priority capital ("Senior Capital") and junior
priority capital ("Series B Capital") of TWE. TW Companies holds 11.22% of the
Series A Capital and Residual Capital limited partnership interests. The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of MediaOne Group, Inc.
("MediaOne").
The TWE partnership agreement provides for special allocations of income,
loss and distributions of partnership capital, including priority distributions
in the event of liquidation. No portion of TWE's net income has been allocated
to the limited partnership interests.
Summarized Financial Information of TWE
Set forth below is summarized financial information of TWE. This
information reflects (i) the transfer of Time Warner Cable's direct broadcast
satellite operations to Primestar, Inc. ("Primestar"), a separate holding
company, effective as of April 1, 1998, (ii) the formation of the Road Runner
joint venture to operate and expand Time Warner Cable's and MediaOne's existing
high-speed online businesses, effective as of June 30, 1998, (iii) the
reorganization of Time Warner Cable's business telephony operations into a
separate entity named Time Warner Telecom LLC, effective as of July 1, 1998 and
(iv) the formation of a joint venture in Texas that owns cable television
systems serving approximately 1.1 million subscribers, effective as of December
31, 1998 (collectively, the "1998 Cable Transactions"). These transactions are
described more fully in TWE's 1998 Form 10-K.
<TABLE>
Three Months
Ended March 31,
1999 1998
---- ----
(millions)
<S> <C> <C>
Operating Statement Information
Revenues.................................................................................... $2,934 $2,910
Depreciation and amortization............................................................... (308) (371)
Business segment operating income (1)....................................................... 651 369
Interest and other, net..................................................................... (225) (164)
Minority interest........................................................................... (68) (64)
Income before income taxes.................................................................. 340 123
Net income.................................................................................. 312 108
- ------------------
(1) Includes a net pretax gain of approximately $215 million recognized in
1999 in connection with the early termination and settlement of a long-
term home video distribution agreement.
</TABLE>
-31-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Cash Flow Information
Cash provided by operations................................................................. $ 788 $ 441
Capital expenditures........................................................................ (305) (352)
Investments and acquisitions................................................................ (47) (230)
Investment proceeds......................................................................... 30 23
Borrowings.................................................................................. 1,160 489
Debt repayments............................................................................. (1,003) (376)
Redemption of preferred stock of subsidiary................................................. (217) -
Capital distributions....................................................................... (154) (172)
Other financing activities, net............................................................. (18) (38)
Increase (decrease) in cash and equivalents................................................. 234 (215)
</TABLE>
<TABLE>
March 31, December 31,
1999 1998
---- ----
(millions)
<S> <C> <C>
Balance Sheet Information
Cash and equivalents.................................................................... $ 321 $ 87
Total current assets.................................................................... 4,123 4,183
Total assets............................................................................ 22,532 22,230
Total current liabilities............................................................... 4,818 4,936
Long-term debt ......................................................................... 6,921 6,578
Minority interests...................................................................... 1,623 1,522
Preferred stock of subsidiary........................................................... - 217
General Partners' Senior Capital........................................................ 615 603
Partners' capital....................................................................... 5,115 5,107
</TABLE>
Capital Distributions
The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. At March 31, 1999 and December 31, 1998, the
General Partners had recorded $1.309 billion and $1.130 billion, respectively,
of stock option related distributions due from TWE, based on closing prices of
Time Warner common stock of $70.81 and $62.06, respectively. The General
Partners are paid when the options are exercised. The General Partners also
receive tax-related distributions from TWE on a current basis. During the three
months ended March 31, 1999, the General Partners received cash distributions
from TWE in the amount of $154 million, consisting of $67 million of tax-
related distributions and $87 million of stock option related distributions.
During the three months ended March 31, 1998, the General Partners received
cash distributions from TWE in the amount of $172 million, consisting of $52
million of tax-related distributions and $120 million of stock option related
distributions. Of such aggregate distributions in the first three months of
1999 and 1998, WCI received $91 million and $102 million, respectively, and ATC
received $63 million and $70 million, respectively.
-32-
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Gain on Termination of MGM Video Distribution Agreement
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, of which $127 million has been included in WCI's
equity in the pretax income of TWE and $88 million in ATC's equity in the pre-
tax income of TWE in the accompanying consolidated statements of operations.
Primestar
TWE owns an approximate 24% equity interest in Primestar. In the fourth
quarter of 1998, TWE recorded a charge of approximately $210 million princi-
pally to reduce the carrying value of its interest in Primestar to fair value.
In January 1999, Primestar, an indirect wholly owned subsidiary of
Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was entered into with DirecTV, pursuant to which
DirecTV agreed to purchase Primestar's rights with respect to the use or
acquisition of certain high-power satellites from a wholly owned subsidiary of
one of the stockholders of Primestar.
In April 1999, Primestar closed on the sale of its medium-power direct
broadcast satellite business to DirecTV. The final terms of this medium-power
transaction confirmed the decline in value of TWE's interest in Primestar
recognized in 1998. The closing of the sale of Primestar's high-power satellite
rights to DirecTV is expected to occur in the second quarter of 1999, subject
to customary closing conditions, including all necessary governmental and
regulatory approvals. There can be no assurance that such approvals will be
obtained and that this high-power transaction will be consummated.
During the period in which Primestar's operations are being wound down,
TWE continues to recognize its share of losses of Primestar under the equity
method of accounting. Such losses are included in interest and other, net, in
TWE's consolidated statement of operations.
3. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of approximately
$5.6 billion of TWE's debt and accrued interest at March 31, 1999, based on the
relative fair value of the net assets each General Partner (or its predecessor)
contributed to TWE. Such indebtedness is recourse to each General Partner only
to the extent of its guarantee. There are no restrictions on the ability of the
General Partner guarantors to transfer assets, other than TWE assets, to
parties that are not guarantors.
-33-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The portion of TWE debt and accrued interest at March 31, 1999 that was
guaranteed by each General Partner is set forth below:
Total Guaranteed by
Each General Partner
--------------------
General Partner % Amount
- --------------- - ------
(dollars in millions)
<S> <C> <C>
WCI ......................................................................................... 59.27 $3,307
ATC ......................................................................................... 40.73 2,272
------ ------
Total......................................................................................... 100.00 $5,579
====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The General Partners are subject to numerous legal proceedings. In
management's opinion and considering established reserves, the resolution of
these matters will not have a material effect, individually and in the
aggregate, on the consolidated financial statements of the General Partners.
5. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
<TABLE>
Three Months Ended March 31,
----------------------------
1999 1998
-------------------- --------------------
WCI ATC WCI ATC
--- --- --- ---
(millions)
<S> <C> <C> <C> <C>
Cash payments made for interest.......................................... $ 3 $ - $ 1 $ -
Cash payments made for income taxes, net................................. 114 50 46 21
Tax-related distributions received from TWE.............................. 39 28 31 21
Noncash capital distributions, net....................................... (158) (108) (133) (92)
</TABLE>
-34-
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings.
Reference is made to the litigation entitled SIX FLAGS OVER GEORGIA, INC.,
ET AL. V. SIX FLAGS FUND, LTD., ET AL. commenced in Superior Court in Gwinnett
County, Georgia in connection with the management of the Six Flags Over Georgia
Theme Park described on page I-28 of TWE's Annual Report on Form 10-K for the
year ended December 31, 1998 (the "1998 Form 10-K"). On April 22, 1999, the
Court denied defendants' post-trial motions for judgment notwithstanding the
verdict, for a new trial and for the remittur of all or part of the damages
awarded by the jury, and also ordered defendants to post a supersedeas bond in
the amount of $454 million. Defendants filed a notice of appeal on April 23,
1999.
Reference is made to the litigation entitled PARKER, ET AL. V. TWE, ET
AL.,described on page I-31 of TWE's 1998 Form 10-K. On April 30, 1999, the
Court granted defendants' motion to dismiss in its entirety and dismissed this
case.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
-------------------
No Current Report on Form 8-K was filed by TWE during the quarter ended
March 31, 1999.
-35-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND TWE GENERAL PARTNERS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the registrants has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
By: Warner Communications Inc.,
as General Partner
By: /S/ RICHARD J. BRESSLER
-----------------------
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
AMERICAN TELEVISION AND COMMUNICATIONS
CORPORATION
TIME WARNER OPERATIONS INC.
WARNER CABLE COMMUNICATIONS INC.
WARNER COMMUNICATIONS INC.
By: /S/ RICHARD J. BRESSLER
-----------------------
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: May 12, 1999
-36-
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule.
-37-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Entertainment Company, L.P. for the three
months ended March 31, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000893657
<NAME> TIME WARNER ENTERTAINMENT
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 321
<SECURITIES> 0
<RECEIVABLES> 2,900
<ALLOWANCES> 477
<INVENTORY> 3,544
<CURRENT-ASSETS> 4,123
<PP&E> 10,033
<DEPRECIATION> 3,848
<TOTAL-ASSETS> 22,532
<CURRENT-LIABILITIES> 4,818
<BONDS> 6,921
<COMMON> 0
615
0
<OTHER-SE> 5,115
<TOTAL-LIABILITY-AND-EQUITY> 22,532
<SALES> 2,934
<TOTAL-REVENUES> 2,934
<CGS> 1,704
<TOTAL-COSTS> 1,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> 340
<INCOME-TAX> 28
<INCOME-CONTINUING> 312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
